EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: May 9, 2016

The following is an excerpt from our Hedge Funds Weekly report, which is available in the clients section. If you are not yet a client, please request access.

Highlights

  • Our factor-based estimates project that hedge funds fell 0.61% last week as losses from foreign equities dominated performance
  • Hedge funds are now down 0.61% for the month and 0.64% for the year
  • Only one of the 30 hedge fund strategies we track earned positive returns
  • We currently project that hedge funds returned 0.79% in April, 0.06% more than our initial estimate of 0.73%
  • Most global assets fell, with foreign securities typically underperforming U.S. securities due to currency losses
  • Most equity sectors, regions and styles fell
  • U.S. Treasuries gained, but inflation-linked securities and high yield bonds declined
  • Base metals and energy commodities gave back a large portion of last week’s rally
  • Foreign currencies depreciated against the U.S. dollar, declining materially on a risk-adjusted basis
  • All of our short volatility and variance factors gained
  • Medium-term momentum strategies continued to rebound from last month’s steep drawdowns

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds fell 0.61% last week as losses from foreign equities dominated performance
  • Hedge funds are now down 0.61% for the month and 0.64% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity size (0.07%), alpha (0.06%) and equity sector momentum (0.04%)
  • It indicates negative weekly contributions from the spread between developed market equities and U.S. equities (-0.41%), equity beta (-0.09%) and equity sector beta (-0.09%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.06%, 0.06% and -0.21%, respectively

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Strategy Performance

  • Only one of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Short-Bias (0.22%), Merger Arbitrage (0.00%) and Equity Market Neutral (-0.02%)
  • Laggards: Emerging Europe (-2.08%), Latin America (-1.93%) and Energy (-1.85%)
  • North American funds outperformed both Asian and European funds
  • The spread between developed market equities and U.S. equities was the most significant factor driving strategy returns
  • Alpha leaders: Asia (0.27%), Distressed Securities (0.21%) and Emerging Asia (0.18%)
  • Alpha laggards: Equity Short-Bias (-0.25%), Technology (-0.19%) and Equity Long Only (-0.08%)

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Global Benchmarks

  • Most global assets fell, with foreign securities typically underperforming U.S. securities due to currency losses
  • Leaders: U.S. REITs (4.75%), U.S. consumer staples equity (1.70%) and global real estate (1.43%)
  • Laggards: emerging EMEA equity (-6.81%), Latin America equity (-5.54%) and base metals (-4.50%)
  • Equities: most sectors, regions and styles fell as equities declined globally
  • Bonds: U.S. Treasuries gained, but inflation-linked securities and high yield bonds dropped
  • Real Estate: U.S. REITs had an atypically strong week, but real estate securities fell overseas
  • Commodities: base metals and energy commodities gave back a large portion of last week’s rally
  • Currencies: foreign currencies depreciated against the U.S. dollar, declining materially on a risk-adjusted basis
  • Multi-Asset: risk parity outperformed 60/40 due to leveraged bond exposure, but neither approach did particularly well

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Market Factors

Note: we report factor performance using excess returns risk-adjusted to an expected annual standard deviation of 10%.

  • Leaders: the spread between U.S. REITs and small cap equities (3.86%), the spread between U.S. REITs and equities (3.54%) and 1-year multi-asset class momentum (3.30%)
  • Laggards: the spread between developed market real estate securities and U.S. REITs (-3.68%), emerging market equity value (-2.94%) and the spread between developed market and U.S. equity (-2.74%)
  • Commodity: term structure and medium-term momentum strategies profited, but other commodity factors struggled
  • Credit: investment grade performance was muted, but high yield was a losing strategy
  • Equity: value stocks materially underperformed growth stocks while small caps underperformed large caps in the U.S.
  • Fixed Income: term structure strategies gained in the U.S. and Europe, while inflation-linked bonds trailed Treasuries
  • Foreign Exchange: value gained, but carry and long foreign currency strategies struggled
  • Multi-Asset: medium-term momentum performed very well, but short-term momentum and trend following underwhelmed
  • Real Estate: REITs substantially outperformed U.S. equities; foreign real estate outperformance was much more subdued
  • Risk: all of our short volatility and variance factors gained, led by our VIX futures term structure strategy
  • Momentum: medium-term momentum strategies continued to rebound from last month’s steep drawdowns

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April 2016 Estimate Review

  • Most of the indexes underlying our composite indexes have reported April returns, but our analysis is still preliminary and subject to change
  • We currently project that hedge funds returned 0.79% in April, 0.06% more than our initial estimate of 0.73%
  • As of this moment, we correctly predicted the direction of 28 of 30 strategies
  • We were within 25 basis points for 13 indexes and within 50 basis points for 23
  • Both our hit rate and our accuracy were above average
  • 18 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: Relative Value (within 1 basis point), Event Driven (within 4 bps) and Hedge Funds (within 6 bps)
  • Least accurate: Healthcare (1.28% worse than expected), Emerging Europe (1.16% better) and Latin America (1.06% better)
  • Overall, our estimates were 91% more accurate than naive forecasts of flat returns

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